IMF Concludes Article IV Consultation with Albania

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 9, 2000, the Executive Board concluded the Article IV consultation with Albania.1

Background

The Kosovo crisis in March 1999 and the large influx of refugees placed a considerable strain on the country. However, the early end to the hostilities, together with generous external assistance and cautious policies, allowed the economy to withstand the crisis. GDP increased by 7¼ percent in 1999; inflation has been negative since mid-1999, following a sharp appreciation of the lek; and official foreign reserves strengthened to a level much above the authorities' target for 1999.

Macroeconomic policies have been in line with the program supported by the Second Annual PRGF Arrangement. The domestically financed deficit was reduced from 6½ percent of GDP in 1998 to 5¼ percent of GDP in 1999, only slightly above the target. Tax revenues, however, were about 1¾ percent of GDP below the program, reflecting lower inflation and weaknesses in tax administration. Since the beginning of 2000, tax collection has substantially improved as a result of measures implemented in late 1999. Monetary policy has been gradually relaxed over the past 12 months, with the Bank of Albania cutting the minimum deposit interest rates by half in several steps, to 7.0-8.0 percent in March 2000. Growth in broad money has continued to be strong, reflecting output growth and increased confidence in the banking system.

Progress in structural reforms has been significant considering the Kosovo crisis. The process of privatizing about 520 small and medium-size enterprises was completed, contracts were signed for the transfer of copper and chromium mines to foreign investors, and albeit with delay, the authorites recently signed agreement with investors on the privatization of the National Commercial Bank. Progress in preparing the Savings Bank for privatization has, however, been limited. The Bankruptcy law has remained ineffective, and the implementation of the collateral law has been delayed to mid-2000. In the area of public administration, the government removed about 5,000 positions from the budget payroll in 1999, and a further 3,000 in the first quarter of 2000. A new Civil Service Law is expected to be implemented in mid-2000.

Albania is the poorest country in Southeastern Europe, with poverty concentrated in its rural regions. Judging from the limited data available, the incidence of poverty appears to reflect mainly low per capita income rather than unequal income distribution. Health indicators compare unfavorably with regional averages, and while almost full literacy has been preserved, enrollment at the secondary education level has dropped by half since the early 1990s. The government has recently approved an Interim Poverty Reduction Strategy Paper, in which it sets out its preliminary priorities for reducing poverty.

Executive Board Assessment

Executive Directors commended the Albanian authorities for their policies to maintain macroeconomic stability, which have helped to achieve a favorable growth performance while keeping inflation close to zero. Directors supported the authorities' policy framework for the remainder of 2000, which aims at continuing rapid growth and low inflation, based on cautious fiscal and monetary policies. While some delays in structural reforms took place as a consequence of the Kosovo crisis, Directors stressed the importance of strengthening the momentum of structural reform and of improving governance to assure sustained, rapid economic growth and poverty reduction.

Directors welcomed recent improvements in tax collection, and the authorities' commitments to combat fraud and enhance the efficiency of both customs and tax administration. They stressed that revenue performance should be monitored closely and, if necessary, additional measures introduced in consultation with the staff. At the same time, Directors underscored the importance of timely refunds of tax credits, the accountability of tax offices, and the implementation of regulations that provide for the protection of complying taxpayers. Improving public administration capacity and institution building in general was also considered essential to facilitate the implementation of the structural reform program.

Directors commended the authorities' prudent monetary policy, which has contributed to keeping inflation low. However, they saw some scope for further easing in monetary conditions in the period ahead, in light of the absence of inflationary pressures and the significant strengthening of the lek against the currencies of major trading partners during the past year.

Directors emphasized that a stronger commitment to financial sector reform would be crucial in encouraging private investment and establishing a market-friendly environment. They welcomed the completion of the sale of the National Commercial Bank and encouraged the authorities to give the highest priority now to privatizing the Savings Bank. Directors noted that rapid improvements in the legal framework for lending, including through the implementation of the new law on collateral and replacement of the bankruptcy law, will be required in order to stimulate the growth of credit allocated to the private sector.

They urged the authorities to pursue vigorously the enterprise privatization program in order to encourage foreign direct investment. Directors noted that attracting long-term foreign capital will also depend crucially on strengthening governance and improving law and order. Removing bureaucratic obstacles to foreign investment—for example, through creating a one-stop shop for new investors—will also help. They also encouraged the authorities to continue their efforts to create an open and liberal trade and exchange system.

Directors welcomed the authorities' efforts to develop a poverty reduction strategy as exhibited in the interim Poverty Reduction Strategy Paper (PRSP), and encouraged them to press ahead with defining their poverty alleviation policies in a full PRSP. They also urged the authorities to address in the meantime those poverty issues that require immediate action, particularly in public health, education, and child care.

Directors recommended that the authorities endeavor to improve the quality and coverage of economic statistics.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.